FSA accused of losing mis-selling files

12:01AM GMT 20 Mar 2004

Legal & General claims the regulator has failed to produce vital paperwork because it has been lost or destroyed, writes Andrew Cave

The Financial Services Authority suffered major embarrassment yesterday when it was claimed that it has either "lost or destroyed" files relating to Legal & General's alleged mis-selling of mortgage endowment policies.

The claim came from Legal's lawyer, Charles Flint, in a preliminary initial hearing of the first mis-selling case to be heard by the Financial Services and Markets Tribunal.

The FSA's regulatory decisions committee has already found that Legal mis-sold endowments between 1997 and 1999. A report by accountants Price Waterhouse Coopers (PwC) found that 60 customers out of a sample of 250 were "unsuitable" for the products.

Legal has refused to pay the FSA's proposed fine and is appealing against the decision.

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Mr Flint said: "Served recent documents appear to suggest - and it is a suggestion we find incredible - that the authority has either lost or destroyed the supervisor files, or some of them, covering the supervision of Legal & General during this time.

"There were supervisory visits in July-August 1995 and in January-February 1999. There are apparently no supervisory files for either visits," he said.

Mr Flint said the FSA's explanation was that the files had not been passed from its predecessor body, the Personal Investment Authority. This suggestion was "simply unsustainable", he said, because another document made it clear that the FSA had been in possession of some of the files in March 2000 - four months before the Legal & General investigation started.

Mr Flint continued: "It is beyond belief that it is the FSA, as the regulator of the life assurance industry, that has actually managed to lose or destroy supervisory files relating to Legal & General in the context of a major investigation dating back to 2000.

"If it turns out that these documents have been destroyed by the FSA or lost by the FSA since this case started, then that might have very serious implications for this case."

The directions hearing was held before David Mackie, tribunal chairman, to clarify issues including whether the FSA is allowed to introduce a new "pleading" containing further evidence.

The regulator also wanted the former Ernst & Young executive Peter Standish to appear as a new expert witness. L&G contested this, saying it had paid £700,000 for the PwC report at the FSA's insistence and that re-doing PwC's role would be "unnecessary, oppressive and unfair".

Simon Hattan, representing the FSA, said the regulator was seeking to show that Legal had systemically mis-sold endowment policies to "low-risk customers" who were not properly informed of the risks involved.

However, he said the FSA could not yet disclose any details about what would be in the new pleading. Mr Mackie told him: "We cannot really plan a hearing on this issue when you are saying to me, 'We may have a second limb of our case. We will let you know'. That seems to be an unacceptable way to proceed."

Mr Mackie gave the FSA until March 29 to submit further details of its case. He said the full tribunal hearing will take place in either July or September.

The FSA is to write to Legal & General about the company's claims over lost documents.